DAWEI LIU SEAN CLARK

MAX LIPSCOMB STEPHEN CHEN

STEPHANIE DOWNEY

43%  

30%  

27%   Home Depot!Lowes!other!

•  Risk-On Environment!–  “Don’t fight the Fed” – QE3!–  Free money – 0.25%!–  $157 billion Chinese infrastructure

stimulus!•  Competitive Advantage!

–  Superior supply chain!–  Geographic positioning!–  First mover advantage!

•  Search for Yield!–  High dividend stocks outperform in

periods of low economic growth!–  Home Depot has higher dividend

yield than three year bond!

RECOMMENDATION: BUY 1YR TARGET: $78.42 (27% UPSIDE)

Source:  Bloomberg  

INVESTMENT THESIS

US CONSTRUCTION

COMPETITIVE ADVANTAGE FINANCIALS

RISKS AND MITIGANTS CONCLUSION

Home Improvement Retail Marketshare!

0  

300  

600  

900  

12/1/06   12/1/07   12/1/08   12/1/09   12/1/10   12/1/11  

Rent to Own Gap!

Source:  Bloomberg  Max Lipscomb!

INVESTMENT THESIS

US CONSTRUCTION

COMPETITIVE ADVANTAGE FINANCIALS

RISKS AND MITIGANTS CONCLUSION

•  Upturn in Housing !–  Housing starts up 15% in September!–  S&P CAPIQ projects 9.8% increase

in residential construction spending in 2012, 16.4% in 2013!

–  Architecture billings reaching pre-crash levels!

–  Rent to own cost ratio at record lows!–  Jamie Dimon: “We believe we have

reached a bottom in the Housing Market.”!

•  QE3 Buyback of MBS!–  Low yields push investors to equity!–  Bank balance sheet cleanup!–  Increase mortgage origination!

0  

500  

1,000  

1,500  

2,000  

2,500  

0.00  

50.00  

100.00  

150.00  

200.00  

250.00  

2004   2006   2008   2010   2012   2014  Case-­‐Shiller  Index   Housing  Starts  

Case-Shiller vs. Housing Starts!

Source:  Bloomberg  

30  

35  

40  

45  

50  

55  

1/1/08   1/1/09   1/1/10   1/1/11   1/1/12  

Source:Bloomberg  

Architectural Billings Index!

Max Lipscomb!

INVESTMENT THESIS

US CONSTRUCTION

COMPETITIVE ADVANTAGE FINANCIALS

RISKS AND MITIGANTS CONCLUSION

•  Consumer debt to income levels are down 15% from 2008 peak.!–  First  Gme  household  debt  service  raGo  below  14  since  1980  –  Indicates  near  end  to  deleveraging  process  –  With  low  interest  rates,  should  conGnue  to  drive  increases  in  mortgages  and  starts  

Stephen Chen!

INVESTMENT THESIS

US CONSTRUCTION

COMPETITIVE ADVANTAGE FINANCIALS

RISKS AND MITIGANTS CONCLUSION

Qualitative Strengths!Lowe’s Failed Sales Policy!•  The “Every Day Low Prices policy” !•  Lowe’s is suffering from the same

problems as JC Penny!Store Geography!•  Present in the economically strong

Northeast!•  Lowe’s present in depressed Sunbelt!Better Supply Chain!•  Rapid Deployment Centers spur

greater margins !•  Fidelitone partnership:!

–  ~70% of goods pass through Central Distribution!

•  4.2 inventory turnover vs. industry 2.8!

First Mover Advantage!•  Lowe’s over expanded!•  HD has first mover advantage!•  Lower advertising costs !•  Lowe’s fights an uphill battle!

230  

240  

250  

260  

270  

280  

290  

300  

Lowes   Home  Depot  

Rev/Sq.=.  ($MM)  

Source:  Bloomberg  

Dawei Liu!

Quantitative Advantages!Home Depot: !•  Last quarter revenue up 1.7%!•  same store earnings up 2.1%!•  Per Share Profit of $1.01 beat

analyst expectations!•  6 month same store sales number

are up 3.8%!•  Higher Current and 10 yr. Avg.

ROE and ROA!Lowe’s:!•  Revenue fell 2%!•  Missed analysts forecasts of $0.70!•  same store sales of -0.4%!

INVESTMENT THESIS

US CONSTRUCTION

COMPETITIVE ADVANTAGE FINANCIALS

RISKS AND MITIGANTS CONCLUSION

35.1%   34.5%   35.3%  41.4%  

9.5%   9.5%   6.2%  

16.5%  3.7%   5.5%   3.9%  

10.4%  

0.0%  

10.0%  

20.0%  

30.0%  

40.0%  

50.0%  

60.0%  

70.0%  

80.0%  

LOW   HD   LL   BBBY  

Net  Margin  

Op.  Margin  

Gross  Margin  

HD Margins vs. Competitors!

HD Current ROE- 21.70; LOW- 11.10!HD Current ROA- 9.60; LOW- 5.50!

 

Source:  Bloomberg  

Dawei Liu!

INVESTMENT THESIS

US CONSTRUCTION

COMPETITIVE ADVANTAGE FINANCIALS

RISKS AND MITIGANTS CONCLUSION

•  Home Depot!–  Same store sales of 3.8% in

the first 6 months of the year!–  No info on Q3 earnings yet!–  Growth:!

•  Fastest in consumer goods, tools, bags, flooring, kitchen !

•  Slower in professional goods!

•  Lowe’s!–  Same store sales -0.4%!

-­‐4  

-­‐2  

0  

2  

4  

6  

8  

1/1/10   1/1/11   1/1/12  

Lowe's  

Home  Depot  

Same Store Sales Growth !

Dawei Liu!

INVESTMENT THESIS

US CONSTRUCTION

COMPETITIVE ADVANTAGE FINANCIALS

RISKS AND MITIGANTS CONCLUSION

DCF w/ Perpetuity Growth Method!

 Key  AssumpQons  

•  Sales  growth:  3%  •  WACC:  8.47%    •  Terminal  MulQple:  11x    

Scenario   Price  

Bear   $56.54  

Projected   $81.26  

Bull   $104.25  

0  

20  

40  

60  

80  

100  

120  

10/11/10   10/11/11   10/11/12   10/11/13   10/11/14  

68.12%  upside  

31.04%  upside  

8.88%  downside  

Stephanie Downey!

INVESTMENT THESIS

US CONSTRUCTION

COMPETITIVE ADVANTAGE FINANCIALS

RISKS AND MITIGANTS CONCLUSION

• Bull Case ($104.25 --- 68.12% upside)!• Housing market rebounds faster than expected!• Consumer confidence increases!• Home Depot is able to continue to out-position Lowe’s!!

• Base Case ($81.26 --- 31.04% upside)!• Housing market rebounds at expected rate!• Consumer confidence remains steady!• Home Depot loses small ground on Lowe’s!

• Bear Case ($56.54 --- 8.88% downside)!• Housing market reverses!• Consumer confidence decreases!• Lowe’s finds strong competitive advantage against Home Depot!

Stephanie Downey!

INVESTMENT THESIS

US CONSTRUCTION

COMPETITIVE ADVANTAGE FINANCIALS

RISKS AND MITIGANTS CONCLUSION

Share Price Fully Market Enterprise Net

Comparable Companies4 Share Price % of Diluted Value Value1 Debt

EBITDA3 Revenue

Ticker (US$)1 52 week

high1 Shares (FY10)2 10/22/12 10/22/12 10/22/12 LTM1 2012E 2013E LTM1 2012E 2013E

LOWE'S COMPANIES, INC. LOW 32.71 98.3% 1140.6 37,309 44,614 7,305 4858.0 4856.0 5080.2 50883.0 50208.0 50011.5 WILLIAMS-SONOMA, INC. WSM 47.20 98.3% 98.4 4,644 4,316 -328 515.3 512.3 553.7 3827.2 3720.9 4018.6 LUMBER LIQUIDATORS HOLDINGS, INC. LL 50.43 93.4% 27.1 1,364 1,332 -32 66.6 75.8 90.8 744.8 777.8 847.8 THE SHERWIN-WILLIAMS COMPANY SHW 150.60 96.2% 102.6 15,452 16,783 1,331 1073.9 1180.6 1365.0 9264.7 9598.6 10289.5

HOME DEPOT HD 62.04 98.2% 1507.4 93,519 101,517 7,998 8894.0 8343.0 9274.5 71718 70395 73726

Sean Clark!

INVESTMENT THESIS

US CONSTRUCTION

COMPETITIVE ADVANTAGE FINANCIALS

RISKS AND MITIGANTS CONCLUSION

LTM Levered

FCF Yield LT Enterprise value as a multiple of

Comparable Companies Price / Earnings (x) EPS3 PEG (x) = FCF2 = Growt

h Equity Revenue (x) EBITDA (x)

Ticker LTM 2012E 2013E 2011 2012E 2013E

P/E / LTG 2011

(FCF/MCAP

) Rate (%)3 Beta1 LTM 2012E 2013E LTM

2012E 2013E

LOWE'S COMPANIES LOW 23.0 22.9 19.8 1.4 1.43 1.65 1.5 2181.0 5.8% 15.3 0.8 0.9 0.9 0.9 9.2 9.2 8.8 WILLIAMS-SONOMA WSM 20.8 20.8 18.7 2.3 2.27 2.52 1.6 240.3 5.2% 13.2 1.3 1.1 1.2 1.1 8.4 8.4 7.8 LUMBER LIQUIDATORS HOLDINGS, INC. LL 53.1 34.8 28.7 1.0 1.45 1.76 3.1 27.7 2.0% 17.1 1.4 1.8 1.7 1.6 20.0 17.6 14.7 THE SHERWIN-WILLIAMS COMPANY SHW 35.7 23.4 19.4 4.2 6.44 7.77 2.3 674.9 4.4% 15.7 0.6 1.8 1.7 1.6 15.6 14.2 12.3

Mean 33.1 25.5 21.6 2.2 2.90 3.43 2.1 781.0 4.4% 15.3 1.02 1.40 1.38 1.29 13.3 12.4 10.9 Median 29.4 23.1 19.6 1.8 1.86 2.14 1.9 457.6 4.8% 15.5 1.06 1.46 1.44 1.32 12.4 11.7 10.5 High 53.1 34.8 28.7 4.2 6.44 7.77 3.1 2181.0 5.8% 17.1 1.36 1.8 1.7 1.6 20.0 17.6 14.7 Low 20.8 20.8 18.7 1.0 1.43 1.65 1.5 27.7 2.0% 13.2 0.62 0.9 0.9 0.9 8.4 8.4 7.8 HOME DEPOT HD 22.0 24.9 20.8 2.8 2.82 2.98 1.5 5122.0 5.5% 14.5 0.963 1.4 1.4 1.4 11.4 12.2 10.9                                                    

<----------------- EPS Multiples ------------------> 24.5 25.0 25.5 26.0 26.5

Implied Share

Price: 68.97 70.38 71.79 73.20 74.61     Sean Clark!

INVESTMENT THESIS

US CONSTRUCTION

COMPETITIVE ADVANTAGE FINANCIALS

RISKS AND MITIGANTS CONCLUSION

1 Year Price Target$78.42!

Comparables Analysis$71.79 !

DCF w/ Perpetuity Growth!$81.26!

70%   30%  

Max Lipscomb!

INVESTMENT THESIS

US CONSTRUCTION

COMPETITIVE ADVANTAGE FINANCIALS

RISKS AND MITIGANTS CONCLUSION

• Company Specific Risks!• Shallow economic moat: superior store placement but other factors like supply chain, products and SG&A structure can be imitated!

• Valuation Risks!• 2.5X EV/EBITDA premium to Lowe’s due to higher margins and higher expected growth. Dependent on status of Lowe’s turnaround efforts!

• Macroeconomic Risks!• Possibility that housing market has not bottomed. Since 2007, 4 separate occasions have been declared bottoms!• Further price increases require continual strengthening of home sales!!

• Bottom Line:!• In the short term (≤1 year) competitive advantage is likely safe !• Strength of recent housing data indicates market has likely bottomed out!• In the long term (2+ years) advantage will likely diminish !• Housing growth may slow if employment and wages remain weak!

Stephen Chen!

INVESTMENT THESIS

US CONSTRUCTION

COMPETITIVE ADVANTAGE FINANCIALS

RISKS AND MITIGANTS CONCLUSION

•  Catalysts!–  Rebound in Housing & Consumption!–  Low interest rates !–  Favorable rent to own!–  Low household debt!–  Continued superiority of same store

sales growth!–  Continued Supply Chain !

•  Stock Movers!–  Excess cash of $2.8 bn for share

buyback or dividend increase!–  Upward pressure on equities in

response to low interest rates!

RECOMMENDATION: BUY 1YR TARGET: $78.42 (27% UPSIDE)

0  

500  

1000  

1500  

2000  

2500  

3000  

2008   2009   2010   2011   2012   Current  

Cash  on  Hand  

Home Depot vs. Home Improvement Index!

Source:  Bloomberg  

0  5  10  15  20  25  30  35  40  45  

0  

100  

200  

300  

400  

500  

2006   2007   2008   2009   2010   2011  S5HOMI   HD  

Max Lipscomb!